It sounds crazy, I know...

A while back I remember promising to someday explain how we are currently subsidizing the big banks but that "you would not believe it if I told you." I've yet to come back to this because the explanation is, quite literally, unbelievable. I did not want to damage our credibility by sounding crazy or conspiratorial to you, our readers. Well, it's an off-day (we typically publish here Monday, Wednesday and Friday) and I've got some backup now, so here I go.

Right now we are loaning big banks, via the Federal Reserve, billions of dollars. This is at very, very low interest rates (practically nothing). The big banks are then loaning the U.S. Treasury billions of dollars at slightly higher interest rates. The big banks pocket the difference, which is - again - literally billions of dollars. There is no risk for the banks - this is just free money.

The reason I'm revisiting this now is that I've run across this video by Marketplace.org that explains it perfectly.

Imagine if someone in Congress put together a bill to give the big banks - Goldman Sachs, Citigroup, JP Morgan, Bank of America, Wells Fargo, etc... - billions of dollars so that they could be "recapitalized", that is, so they would have more money? It wouldn't happen because no voter would tolerate it. And rightly so, especially when these banks blew up the system, are still giving billions in bonuses to those same people that did it, still owe us money from the bailout and have done nothing to reform their practices. Talk about moral hazard!

Imagine now if someone in Congress put together a bill to finance our national debt by having the Federal Reserve "loan" the Treasury money, essentially making money appear out of thin air and then giving it to the Treasury to pay off our debts, with the Treasury providing a wink-and-nod IOU in return. Would this be tolerated? There is no chance it would be - the reckless risk of runaway inflation would simply be too great. Such a bill would have no chance in Congress.

But with no vote, no Congressional proceeding, no national debate, and with little public knowledge outside of a few places that follow the financial markets, we are doing both of these things. And yes, it is so crazy to even consider that I've actually been nervous about bringing it up here for fear of being branded a "conspiracy nut".

A financially healthy economy does not resort to such actions.

We're not bringing this up to suggest that one political party or another is to blame, that one set of politicians or another should be held accountable or that one set of policy responses or another should be adopted. Our entire point is this:

A local economic strategy that relies on the federal and state governments to create the conditions for growth so that your community can afford to pay its bills, maintain its infrastructure and attract a share of the wealth, is a strategy out of touch with reality. A local financial strategy that relies on grants and loans from the federal and state governments for either attracting growth or maintaining basic services, is likewise a fantasy.